CHAPTER 6

IMPLICATIONS OF FOREIGN BANKING AND OFFSHORE FINANCIAL CENTRES FOR MONEY LAUNDERING IN THE REGION

Profiling Money Laundering in Eastern and Southern Africa

Bothwell Fundira

Introduction

Major and small financial centres regularly advertise their services on the World Wide Web. The services include internet banking, which enable individuals or corporations to open accounts without setting foot in a bank.

Some financial centres have gone a step further to ensure and guarantee that only the top officials of the institution may access certain account details. As a result, financial centres have been found useful by drug traffickers and corrupt politicians. This paper looks at how foreign banking and global financial centres can assist money launderers in the sub-region, using Zimbabwean case studies.

The use of global financial centres adds a new dimension to the menace of money laundering. By making use of these centres, an individual or company can introduce two jurisdictions into the equation, with different norms and laws. Money launderers are invariably attracted to environments where there are lax exchange, income and inheritance tax laws.

There are financial centres that assist in the concealment of ill-gotten gains by providing false invoices and bills of lading. Normally, launderers are clever enough to introduce an additional layer of defencea lawyer to ensure that, in accordance with client confidentiality, there is no scrutiny of the transactions. Nominee ownership of accounts offers an additional useful protection to the money launderer.

Financial systems play a pivotal role in the disguise of the proceeds of crime. It is not coincidental that financial institutions of various descriptions are made accountable wherever anti-laundering legislation is introduced.

Banks, which are at the core of financial systems, have been able to develop sophisticated products, which has added additional mystique to already complicated financial systems. Transactions within banks are carried out across borders, which avails the money launderer the opportunity to conceal ill-gotten gains.

Financial centres and the link to money laundering typologies

What follows is a discussion of some of the prevailing money-laundering typologies and the way global financial centres fit into the picture. Below is an illustration of how foreign banking can be used to launder funds using methods like transfer pricing. Thereafter, laundering vehicles/ facilitators are dealt with to the extent that they are relevant to foreign banking and offshore financial centres.

Methods of money laundering

Transfer pricing

Transfer pricing works as follows: an organisation charges for goods or services at prices that are not market related with the aim of moving funds out of or into a chosen jurisdiction. Exporters use this method to ensure that funds earned from exports are externalised. This is done in order to circumvent stringent foreign currency controls. One of the key aspects of global financial centres is that there is a high degree of secrecy with which transactions are undertaken. These conditions are ideal for effective transfer pricing.

Example

Holding company A has its Head office in country X and a subsidiary B in country Z. Company A sells goods to company B worth US$500 000 but the invoices and shipping documents are altered to reflect a value of US$100 000. The net effect is that US$400 000 is externalized to country Y. Income tax and duty values are altered in contravention of the law. The difference of US$400 000 is concealed from the authorities.

Shell and nominee companies

Shell companies typically do not carry out activities on a day-to-day basis and are often formed in order to fulfill particular transactions. Money launderers open accounts in the name of such companies, deposit ill-gotten gains and subsequently introduce the proceeds into the formal system, thereby completing the laundering process. A company can deposit money through a negotiable instrument like bankers' acceptances or negotiable certificates of deposit. This can be done using ill-gotten gains and on maturity, the funds can be deposited in the account of a shell company. A number of such transactions can be carried out leading to the destruction of the audit trail.

Shell and nominee companies are normally used in money laundering in order to disguise the identity of the perpetrator of the predicate offence. The fact that there is a high degree of secrecy in the financial centres provides the perpetrator with suitable camouflage.

Registration of shelf companies in financial centres typically means that the companies at worst pay minimum taxes and in some cases avoid paying taxes altogether.

Banking institutions

Financial institutions have a remarkable ability to move substantial sums of money all over the world with no questions asked. Amounts can be transferred at the speed of a telephone call to a desired destination.

The following instruments made available by banks are good vehicles for the typical money launderer:
  • SWIFT: Society for Worldwide Interbank Financial Telecommunications System
  • CHIPS: Clearing House Interbank Payments System
  • FEDWIRE: Federal Reserve
The above methods are ideal for the money launderer because transactions can be carried out repeatedly and speedily. The other traditional instruments are slower and cumbersome to effect.

Derivative instruments

Interest-rate swaps

A company or individual can 'buy forward' future interest obligations. 'Buy forward' involves agreeing ahead of time the obligations to be delivered later in terms of a financial contract. A buy forward arrangement enables a company/organisation to go to a bank and agree in advance the interest burden on a current or future loan.

Exchange rate swaps

A company or individual is able to predetermine obligations in a future exchange-rate arrangement. A company or individual in the same group can go into interest rate swap. Company A can have interest rate obligations in pound sterling and exchange (swap) the liability with company B for a US dollar liability. In this case, company B would have a current or future US dollar liability. Bank transactions of this nature can give legitimacy to laundered funds.

Bills of exchange

These are normally documents that promise payment to the bearer. They are as good as bank notes.

Negotiable certificates of deposit

These are faceless documents payable to the bearer. A negotiable certificate of deposit is essentially a fixed deposit except that the payee is not reflected on the instrument. Proceeds can be paid to nominated third parties, which makes it difficult to identify the principal in a money laundering situation.

Banking institutions: Lack of regulation

An illustration of the abuse of the banking system is the unreported case in Zimbabwe of Roger Boka and United Merchant Bank v The State. Boka, who had formed a bank, used his lawyer, Gregory Slatter, to open trust accounts that were used in laundering activities. The Boka case illustrated the ease with which capital could be siphoned off to offshore accounts or loaned to politically connected individuals and corporate entities. By using a lawyer, the proceeds were rendered relatively safe from public scrutiny. Slattter opened a foreign account in the United Kingdom into which it appears some of the money was deposited.

The Ministry of Finance has tended to issue banking licences in cases where the promoters can raise the required capital to start a financial institution. There is scant attention to management capacity. Management deficiency was responsible for the demise of Universal Merchant Bank, Zimbabwe Building Society, First National Building Society, Genesis Investment bank and its predecessor, Trade and Investment Bank.

Mr. Boka was granted a banking licence in 1995 to start operating a Merchant Bank, which he named United Merchant Bank. He was an entrepreneur of note, having successfully started other ventures. What was clear though was that he did not have the experience to run a bank, and that if he had been subjected to the rigorous screening processes required of bank promoters, he would have come seriously short.

As a banking institution, United Merchant Bank accepted deposits and paid interest rates well above the market average (part of the cleaning process). Boka was not concerned with the profitability of the bank but rather with ensuring that he would get liquidity to launder by way of deposits The deposits were partly used to finance personal obligations both inside and outside Zimbabwe.

United Merchant Bank was given the mandate by government to raise funds for the operations of the Cold Storage Company, a parastatal involved in beef production and sale within and outside Zimbabwe. It was to issue bills to the value of $413 million. For some reason, a government guarantee was issued to the value of $855,16 million. Mr. Boka proceeded to issue an additional $1,263 million worth of Cold Storage Company bills. He was able to issue as many bills as he wanted because the bills are tradable.

Mr. Boka opened external accounts and proceeded to purchase foreign currency and transfer it to accounts outside the country. He deposited money in Botswana, South Africa and the United Kingdom. Depositors' funds were mingled with personal funds and used to acquire properties. One of the more prominent properties was a tobacco auction floor outside Harare, which became the biggest tobacco auction floor in the world! Boka was able to move money into and out of the accounts in order to finance transactions both within and outside Zimbabwe.

This case also illustrates how political considerations can be used to obtain a bank licence. Ordinarily, the proprietor and promoter would not have been allowed to run a bank. When his bank was in a bad state, Boka blamed high-level officials for not repaying money owed to the bank. He was eventually but somewhat belatedly charged under the Serious Offences (Confiscation of Profits) Act, but died before the case could be tried.

At the time of writing, the laundered funds had not been repatriated.

The Banking Act does not give power to the governor of the Reserve Bank to issue or revoke bank licences. Ironically, the governor is required to supervise banks in circumstances where his power and influence is confined to pointing out problems.

Lawyers' trust funds

In many parts of the world lawyers have been used by individuals whose intention is to conceal their illegal activities. The case of Aitken and another v Attorney General1 shows how the privilege of trust accounts can be used in undertaking illegal activities.

Aitken, a prominent Harare lawyer, deposited funds into his practice's trust account and subsequently used them to carry out illegal activities. Aitken identified individuals with foreign currency held in accounts abroad. He would match these individuals to companies that required foreign currency. Agreements would be reached to exchange currencies using a parallel market rate. The predicate offence in this case was the dealing in foreign currency in a manner that was not allowed under Zimbabwean law. The funds were introduced into Zimbabwe in the form of goods and services, such as luxury items like motor vehicles. Automated Teller Machines (ATMS) were also imported for banks. In order to finance the transactions, money was paid into the lawyer's trust account. Only the lawyer knew who paid in what amounts into the trust account through specialised codes. A foreign account in London, as indicated below, was used to effect these transactions. The trust account was used to clean the ill-gotten gains as and when the providers of the foreign currency were paid their dues and the lawyer got his commission.

Seven charges of contravening the Exchange Control Act (1997) and section 63 of the Serious Offences (Confiscation of Profits) Act were leveled against Aitken and a business partner.

Section 63 of the Serious Offences (Confiscation of Profits) Act deals with money laundering. A person or body corporate is deemed to have committed money laundering in circumstances where he:
engages directly or indirectly, in a transaction, whether in or outside Zimbabwe, which involves the removal into or from Zimbabwe, of money or other property which is the proceeds of a crime: or receives, possesses, conceals, disposes of, brings into or removes from Zimbabwe, any money or other property which is the proceeds of crime: and knows or ought to have reasonably known that the money or other property was derived or realised, directly or indirectly from the commission of an offence.
It was alleged that because of this arrangement, the country was deprived of foreign currency that would otherwise have come into the country.

It proved difficult for the state to obtain details of external accounts that were used in the exercise, making a full prosecution impossible. Other suspects in this case were never brought to court for lack of evidence. According to the prosecutor, efforts to get leads from Lloyds Bank were fruitless because the investigating officers were told that the records were destroyed by fire.

In this case, it appears that a global financial centre, Lloyds Bank, was used in order to carry out laundering activities.

Stockbrokers


Individuals and companies can purchase shares on the London Stock Exchange and trade them on the Zimbabwe bourse at inflated prices, especially at a time of high demand for hard currency in the country.

Stockbrokers have proved to be an effective way of laundering by externalising funds from the country. This is achieved by using dually listed companies. It is a requirement in Zimbabwe that all foreign currency transactions should be sanctioned by the Central Bank. At the time of writing the official exchange rate was pegged at US$1 to Z$55, whereas the parallel rate was generally between US$1:Z$1 500 and US$1:Z$2 000. Shares in dually listed companies can be traded in at least two jurisdictions, depending on the countries of listing. In Zimbabwe, dually listed shares include Old Mutual, NMB Bank, PPC and Trans Zambezi Industries. Under the arrangement, shares are bought on a foreign stock exchange and off-loaded on the local bourses where parallel exchange rates are obtainable and provide more favourable returns.

The Old Mutual share price moved from Z$70 in July 2000 to Z$1 150 in August 2001. As of 27 March 2003, the price had come down to Z$ 950 because of the effect of the Iraq war.

Interestingly, the fall in the share price coincided with the September 11 attacks. It is a fact that the Old Mutual share price moves up and down in harmony with the fortunes of the foreign-exchange parallel market. Because of their fungibility, the shares have been used to take foreign currency out of the country. Old Mutual is listed on the London Stock Exchange.

A large listed commercial bank is under investigation for having transferred Old Mutual shares to the London and Johannesburg stock exchanges without Reserve Bank approval. The Central Bank claims that, as a result, the country was deprived of £1,4 million and ZAR9 million.

This fungibilty may even provide crime syndicates or terrorist organisations with opportunities to move funds so that they can finance their activities without detection.

Bureaux de change and money transfer companies

At the time of writing, bureaux de change and money transfer companies are probably the foremost perpetrators of money laundering in Zimbabwe. Bureaux de change facilitate the externalisation of hard currency from Zimbabwe under the pretext of assisting Zimbabweans living outside the country to send money home. Nationals living abroad are provided with external account numbers into which to deposit hard currency. In turn, the Zimbabweans provide local accounts into which the local equivalent can be paid at the parallel rate. This deprives the country of much-needed foreign currency.

Bureaux de change were formally abolished in November 2002 by government decree, but they have continued to exist, albeit as informal structures, often disguised as money lending institutions.

Global financial centres make it possible to transfer or manually deposit or withdraw funds in many jurisdictions. This is not peculiar to global financial centres but such centres offer an additional incentive in laundering activities, partly on account of the secrecy observed by the financial centres.

Conclusion


In conclusion, it can be seen that global financial centres are an integral part of money laundering in the region. Money is transmitted from Zimbabwe through the banking system and bureaux de change. This was the ostensible reason behind the ban on the bureaux.

The solution lies in getting the Zimbabwean economy back on track. There is need to review the system through which the Zimbabwean dollar is controlled at unrealistic levels, a phenomenon which leads to normally law-abiding citizens breaking the law only so that they can enjoy the correct compensation in financial transactions.

The logical starting point is to educate the populace on the menace of money laundering. After the education exercise, it will be necessary to formulate appropriate legislation. In coming up with appropriate legislation, it will be important to take into account the views of all key stakeholders.

Note

  1. 1992 (1) ZLR 249 (S).